Is Pakistan an emerging market?

by | Feb 13, 2012

Most people in the West believe that Pakistan is an unstable country on the verge of imminent collapse or an explosion of violence. It is consistently portrayed—by politicians, policymakers, and the media—as the most dangerous and dysfunctional state in the world, struggling with terrorism, an out-of-control military, and interreligious conflict.

And yet, Pakistan is included on Goldman Sachs’ list of the next eleven (N-11) most important emerging markets. Although it has (along with Nigeria and Bangladesh) “broad and systematic issues across a range of areas” that will prevent it from fully delivering on its growth potential, the country’s large population (it currently has 180 million people) assures its inclusion. Indeed, within a generation, Pakistan will have the fourth largest number of people in the world, behind only India, China, and the United States, and be a market too significant to ignore.

It was possible to see this potential before 2007. Ranked highly for the openness of its markets, the country drew billions in foreign investment in the mid-2000s while chalking up growth rates of seven percent per year. Its equity markets were one of the best performers worldwide. The middle class was expanding rapidly, reaching into the tens of millions. Goldman predicted in 2007 that Pakistan could “ultimately have the potential to become similar to the smaller of today’s G7 in terms of size.”

Of course, much has changed since 2007. Or has it?

To be sure, the country has a wide range of problems. Political instability, insecurity, natural disasters, and energy shortages dominate the news. Ineffectual leadership and a weak state apparatus stifle progress in a whole slew of areas and prevent forceful action to deal with these issues. And, of course, there is terrorism, an out-of-control military, and interreligious conflict.

But except for spikes in terrorist attacks and drone strikes—and a concomitant deterioration in sentiment towards and within the country—all of Pakistan’s other problems existed five years ago.

And despite it all, Pakistan’s economy avoided a recession during the financial crisis and has managed to achieve 3-4 percent growth since. Middle class consumers started to spend again in 2011. The rural economy is experiencing a boom from high commodity prices.

Many of the problems the country faces can be found in some form in other emerging markets such as India, Indonesia, Mexico, and Nigeria, all of which are increasingly targeted by international investors. Nigeria, for instance, has suffered from terrorism, attacks on churches and mosques, and nationwide strikes—all in the last few weeks. It also has a long history of military intervention into politics. Mexico’s war against the country’s drug cartels has produced nearly 40,000 deaths over the past five years—roughly the same number as Pakistan’s troubles (in a country that has far fewer people).

India, which is more like Pakistan than either would care to admit, has many of these same problems. It currently faces an insurgency that operates in over one-eighth of its districts. Its government has more often than not been a hindrance to development. Many of it northern states have social development indicators worse than Pakistan. Yet, it is considered one of the most important emerging markets in the world.

Pakistan also has a number of important assets that contributed to its former success in attracting investment, including an able pool of professionals, an enterprising business community, a significant industrial base, and a modern banking system. It is a very investor-friendly country in terms of regulation and a relative lack of corruption. Its low wages, strategic location, and large domestic market offer an abundance of opportunities for investment and trade.

It also is a much less violent country than commonly believed. The homicide rate per year per 100,000 inhabitants is one-third of Brazil’s, on par with Estonia, and lower than Costa Rica, Kazakhstan, and Indonesia, none of which are known as especially violent places. As Pakistani ambassador to China Masood Khan told the China-Pakistan Cooperation Conference in Beijing in October:

I think that this common perception that the whole of Pakistan is insecure is not true. Vast parts of the country are secure for foreign investment.

However, this is certainly not how the country is perceived. Indeed, “You tend to hear the worst 5% of the Pakistan story 95% of the time,” as Pakistani entrepreneur Monis Rahman explained.

Changing the narrative—returning it to where it was half a decade ago—may not be easy, but offers very high returns. After all, Pakistan’s economy will determine the long-run path for the country, making it a more critical issue than many of the immediate crises plaguing the state.

Possibly the best way to do this would be to open up trade with India. As Dr. S. Akbar Zaidi has noted,

It would be revolutionary—there is a massive potential for trade between India and Pakistan, and if this were realized, then there would be concurrent massive changes in the political and social economy of the country.

The recent decision by Pakistan to grant Most Favored Nation (MFN) status to India could be extremely significant, but it remains unclear whether the deal will actually go through.

Donors such as DFID and USAID, both of which have made the country one of their top priorities, have a lot at stake here. The effectiveness of their programs for Pakistan depend to a great extent on whether this narrative can be changed such that investors return, growth rates pick up, and a virtuous cycle that eases many of the country’s ailments can be started.

They therefore should be emphasizing programs that can change this narrative. Besides indirectly aiding efforts to open up trade with India, they ought to consider what might change perceptions about Pakistan. What initiatives might ensure enough security for investors so they factor it more out of their thinking? What projects might make people (inside and outside the country) think differently about Pakistan’s prospects? How might the country’s positives be better broadcast to those (such as the diaspora) with the greatest possibility of putting their money at risk? How might the country’s burgeoning remittances be better channeled towards development? How might the legions of small businesspeople that matter so much to the economy be encouraged to believe more in its future (and thus invest more)?

As the recent financial crisis made vividly clear, investors often choose between greed and fear with a herd mentality. Right now everyone is scared of Pakistan. Those outside of the country stay away. Those inside are risk adverse. These concerns are not completely unwarranted, but they are immensely exaggerated. Whatever can be done to break this bubble of pessimism promises to have a large impact on the country’s future.


The above is based on my work chairing the working group on State Building in Pakistan during the 2011 Global Economic Symposium.


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    Seth Kaplan is a Professorial Lecturer in the Paul H. Nitze School of Advanced International Studies (SAIS) at Johns Hopkins University. He teaches, writes, and consults on issues related to fragile states, governance, and development. He is the author of Fixing Fragile States: A New Paradigm for Development (Praeger Security International, 2008) and Betrayed: Politics, Power, and Prosperity (Palgrave Macmillan, 2013). A Wharton MBA and Palmer scholar, Seth has worked for several large multinationals and founded four companies. He speaks fluent Mandarin Chinese and Japanese.

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